Money Weighted versus Time Weighted Attribution
Carl Bacon, Chairman, StatPro
In one sense there ought not to be too much
discussion about the relative merits of money-weighted or
time-weighted attribution, the attribution methodology must be consistent with
the methodology used to calculate the total return of the
portfolio, hence for time-weighted returns use a time-weighted
attribution methodology and for money weighted returns use a
money-weighted attribution methodology. 
Perhaps a better starting point therefore; is
a broader debate about the relative merits of each return
methodology and an understanding of their evolution.
The Internal Rate of Return (IRR method) is an
old methodology borrowed by performance measurers from other fields
of finance. More often it is used as forward looking measure; the
redemption yield on a bond for example or perhaps used by an
accountant in project appraisal.
In the context of performance measurement the internal rate of
return is the constant force of return which when applied to the
start market value and the external cash flows of the portfolio
results in the end market value. External cash flow in this context
is genuine new money added or subtracted from the portfolio, not
cash resulting from income, corporate actions or internal
transactions.
Internal rates of return are notoriously
difficult to calculate and require the use of iterative methods to
obtain a solution, four such methods include[i]:
i) Interval
bisection method
ii)
Secant method
iii)
“Regula falsi” method (False position)
iv)
Newton-Raphson method
[i] For more
information on these methods see Adams, Bloomfield, Booth and
England, Investment Mathematics and Statistics, 1993
